Tuesday, April 10, 2012
There’s been a lot of hubbub lately about a new rule that was supposed to go into effect on April 1.
I say “supposed to” because the FHA has since rescinded the rule, at least until July 1, and is now asking for public comment to get their head around it all.
My guess is that it will be overturned, and things will go back to how they are now, but only time will tell.
The Rule in Question
In short, the new underwriting rule requires prospective FHA loan holders to pay off any collection or combination of collections that totals more than $1,000.
So if you happened to have an erroneous medical collection, or were currently disputing a credit card collection, you’d have to settle it before receiving your FHA loan.
Even if the charge happened to be bogus, if you wanted an FHA loan, you’d either have to pay the collection off in full or setup a payment plan with the collection agency (and make three verifiable payments).
Those payments would also factor into a borrower’s debt-to-income ratio, which could limit or jeopardize the mortgage.
Put simply, you’d have to make a commitment to pay off the debt in order to qualify for the mortgage.
In the past (and I suppose currently), the FHA did not require that collection accounts be paid off as a condition of mortgage approval (unless it was a court-ordered judgment).
Sure, underwriters would still need to take a look to see what it was and how it might impact the issuance of a mortgage, but it wouldn’t be an outright roadblock.
Why the New Rule is a Problem
The new rule is problematic for a couple reasons. I suppose the biggest issue is that FHA loans were originally intended for lower income borrowers with little money set aside for down payment.
So those with sizable collection accounts, and presumably little cash on hand, would probably have difficulty paying off the debts while having enough money leftover for down payment, closing costs and future mortgage payments.
Along with that, the rule essentially forces would-be borrowers to pay off the collection account(s), even if they aren’t legit. Or if they are currently in dispute.
There are plenty of erroneous collections out there, so forcing borrowers to settle them isn’t necessarily fair.
*The FHA excludes disputed accounts or collections resulting from identity theft or unauthorized use if appropriate documentation is provided.
All that said, this is a good lesson for first-time homebuyers and current homeowners alike to stay on top of their credit.
That means ordering a credit report several months before applying for a mortgage to see where you stand, and also to ensure that nothing is reporting in error (or legitimately) that could hold you back from obtaining a mortgage.
Monday, April 9, 2012
While a streamline refinance may be your easiest option, it may not be the best choice for you.
Whenever you’re in the market for a refinance, it’d be wise to take the time to shop around.
That means looking beyond your current lender and/or loan type to see if there’s something better out there.
You may find a lower mortgage rate with a new lender that will justify a more lengthy qualification process.
Sure, it can be a pain to refinance your mortgage, but the savings afforded each month and over your lifetime should definitely be worth your time.
Thursday, April 5, 2012
When determining how much house you can afford, you need to take into account your entire housing payment, not just the mortgage payment.
And certainly not the interest-only mortgage payment, which used to be the norm before the mortgage crisis reared its ugly head.
For example, you may find that you qualify for a mortgage at a rate of 4.25% on a 30-year fixed.
On a $200,000 loan amount, the monthly mortgage payment would only be $983.88. Pretty cheap, right?
However, you also need to factor in property taxes and homeowners insurance, not to mention maintenance costs and other intangibles.
And if it’s a condo, you’ll also need to factor in the HOA, which can be pretty pricey. In fact, in Los Angeles, many condos have monthly HOA dues that exceed $400.
So let’s assume you buy a condo that sells for $250,000, and put 20% down. As mentioned, your mortgage payment would fall below $1,000, which could be lower than the rents in the area.
But once we add the monthly HOA dues of say $400, and another $350 for taxes, you’d be looking at a monthly housing expense of roughly $1,750.
Assuming you put even less than 20% down, you may also be subject to private mortgage insurance, which could further increase your housing costs.
Wow. What happened to that $1,000 a month mortgage payment? It nearly doubled in the blink of an eye.
Consider All Other Expenses
Aside from your entire housing payment, you also need to consider all your other monthly obligations, such as car lease payments, credit card payments, health insurance, utilities, etc., etc.
All of these items will be a factor in determining your debt-to-income ratio, which banks and mortgage lenders rely upon to determine how much you can borrow. Yes, they have a say in it also.
The DTI ratio is broken down into a front-end ratio and a back-end ratio.
You may see limits of 30/45, meaning your monthly housing payment cannot exceed 30 percent of your gross monthly income, and your housing payment plus all other monthly obligations cannot exceed 45 percent of gross income.
So even if you think you can afford more, the lender will limit you based on their own risk appetite. Of course, their limits are usually pretty high, so if you’re exceeding them, you may be headed for trouble.
The Mortgage vs. Income Rule of Thumb
I hate rules of thumb. Why? Because we aren’t all the same, so one single rule won’t work for everyone.
And it’s just lazy. Instead of actually running the numbers, you’re relying on a rule that someone came up with to sum it all up, which could be completely wrong.
Some say to buy a home that is worth 2.5 times your annual gross salary. So if you make $100,000 a year, you’ll be able to buy that $250,000 condo.
But what if the HOA is $500 a month. Or just $200 a month? That $300 difference is certainly significant. Or what if it’s a house without HOA dues?
And what if you only put down 3.5% down via an FHA loan, as opposed to coming in with 20% down and avoiding mortgage insurance entirely?
As you can see, housing payments can fluctuate wildly, so you can’t just rely on a blanket rule.
Speak with your loan officer or mortgage broker to get a good idea of what you can afford when they get you pre-approved. And make sure you’re comfortable with the payments.
At the end of the day, everyone is different, and you may only want a house that is “X” times your salary, while another person may be comfortable with a housing payment double that.
Tuesday, April 3, 2012
The Department of Justice filed a lending discrimination case against New York-based GFI Mortgage Bankers, claiming the lender violated fair lending laws by charging minority borrowers higher interest rates on mortgages when compared to other borrowers with similar credit profiles.
The U.S. Attorney's Office for the Southern District of New York accused the firm of charging African-American and Hispanic borrowers higher interest rates, violating the Fair Housing Act and Equal Credit Opportunity Act.
The DOJ asserted that white borrowers in similarly-situated situations obtained different mortgage rates. GFI Mortgage Bankers could not be immediately reached for comment early Tuesday morning.
U.S. Attorneys claim from 2005 to 2009, GFI charged minority borrowers excessive rates, with the average African-American borrower paying an average of $7,500 more in the first four years when compared to similarly-situated white borrowers. For Hispanic borrowers, the difference was approximately $5,600 or more.
"The disparities, based on race or national origin, are statistically significant, and are unrelated to credit risk or loan characteristic," the DOJ claimed in a press release.
GFI Mortgage Bankers did not immediately respond to a request for comment.